Debt woes persist for Schenectady
Council urged to pay minimum amount for another year
SCHENECTADY The City Council may continue for another year the policy of paying almost nothing but interest on its debt.
At Monday’s council committees meeting, new Finance Commissioner Deborah DeGenova advised the council to keep paying 1 percent interest and the minimum possible principal payment on its $66.8 million in debt. That minimum payment has meant the city has made virtually no progress paying off the money it has borrowed after 2008.
DeGenova said the city couldn’t afford to pay more to reduce the principal of the loans this year.
Schenectady will have to pay more next year, by law, increasing the city’s debt payments by about $800,000 a year, according to 2012 estimates.
It’s better to wait until next year for that, DeGenova said.
“We are anticipating the city will be better positioned to take on long-term debt [next year],” she said, adding that she doesn’t think interest rates will jump.
“The market will be much as we see it now,” she said.
Most of the City Council accepted her advice in an informal committees vote. Councilman Vince Riggi was the only council member to object, asking about higher principal payments.
The council will formally vote next Monday.
After the meeting, Riggi said the city’s policy was the wrong way to go.
“We’re making the minimum payment on our credit card,” he said.
As the city borrowed money from 2009 through this year, it used bond anticipation notes.
A BAN is a temporary loan intended for short-term borrowing, and usually municipalities hold them for only six months before converting the money to a bond. But the interest rates for BANs are about 1 percent now, while bonds have an interest rate of more than 4 percent.
Councilman Carl Erikson said it made sense to keep the loans in BANs for another year to avoid the higher interest rate.
“The BANs are a much lower interest rate, so the longer we can keep them in BANs, the better,” he said.
Next year, the city’s $20 million loan on its Bureau of General Services building must be moved to a bond.
When that happens, city officials are planning to make very small principal payments to make the bond more affordable.
Currently, the city is paying $2 million a year in principal on $16.5 million in bonds. When the additional $20 million is added to the bonds, the city could arrange to keep paying only $2 million in principal each year. But the city would have to pay $800,000 more a year in interest to account for the increased debt.
The situation is similar to a mortgage: The higher the principal payment, the sooner the loan is paid off. Increasing the size of the loan while paying the same amount in principal means it will take far longer to pay it off and will ultimately cost much more in interest.